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Blue Owl Capital has permanently halted redemptions in its $1.7 billion OBDC II retail private credit fund due to a liquidity mismatch caused by rising withdrawal requests, signaling broader stress across the $3 trillion private credit market.

Warning signs are mounting, including 40% of direct lenders generating negative free cash flow, 30% of companies with debt maturing before 2027 reporting negative EBITDA, middle market default rates climbing to 4.55%, and downgrades outpacing upgrades for seven consecutive quarters.

If pressure continues, small businesses could face tighter funding, refinancing costs may rise, and defaults could accelerate into a self reinforcing cycle. Although the Fed injected $18 billion in overnight liquidity, it may not be enough to prevent further cracks unless policy turns more dovish.

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